U.S. Macroeconomic Conditions: Implications for … Karagozoglu_en.pdfEMEA Macroeconomic Outlook :...

U.S. Macroeconomic Conditions:

Implications for Global

Derivatives Markets

Ahmet Karagozoglu, Ph.D.

Professor of Finance Academic Director of Martin B. Greenberg Trading Room Zarb School of Business, Hofstra University New York, USA

11th Shanghai Derivatives Market Forum 28 May 2014

Ahmet Karagozoglu, Hofstra University, USA

Outline

Macroeconomic Outlook: Forecasts for 2014 to 2016

United States, BRICS, EMEA and China

Macroeconomic Outlook: Forecasts for Q2’14 to Q2’15

United States, China vs. U.S.A

Changes in Financial Conditions from May’13 to May’14

United States and Euro Area

U.S. Monetary Policy: Federal Reserve rate changes

Commodity Price Forecasts

Price Discovery role of exchange traded derivatives

Food vs. Energy

Market Impact Analysis: Informational efficiency of equity markets

Financial Markets : Past, Present & Future

Conclusion: Noteworthy Issues to Watch

2

28 May 2014

11th Shanghai Derivatives Market Forum


U.S. Macroeconomic Outlook : 2014 to 2016

3

Macroeconomic

Forecasts

Decrease in

Unemployment

Increase in

GDP growth

Modest

Increase in

Inflation

Implications

for Fed’s QE ?

28 May 2014


Source: Bloomberg

Forecast


BRICS Macroeconomic Outlook : 2014 to 2016

4

Macroeconomic

Forecasts

Brazil, Russia

India, China

South Africa

Relatively flat

growth, inflation

and

unemployment

28 May 2014


Source: Bloomberg

Forecast


EMEA Macroeconomic Outlook : 2014 to 2016

5

Macroeconomic

Forecasts

Eastern Europe

Middle East,

Africa

Modest increase

in GDP growth,

decrease in

unemployment

compared to

BRICS

28 May 2014


Source: Bloomberg

Forecast


China Macroeconomic Outlook : 2014 to 2016

6

Macroeconomic

Forecasts

China

To continue higher

than average

GDP growth

while maintaining

steady inflation &

unemployment .

USDCNY

RNB to

depreciate ??

28 May 2014


Source: Bloomberg

Forecast


U.S. Macroeconomic Outlook : next 5 quarters

7

Macroeconomic

Forecasts

EURUSD

US Dollar to

appreciate

Decrease in

Unemployment

Slower

Modest

Increase in

Short to

Medium term

Interest Rates

Implications

for Fed’s QE ?

28 May 2014


Source: Bloomberg

Forecast


China vs. U.S. Macroeconomic Outlook : Q2’14 to Q2’15

8

Macroeconomic

Forecasts

GDP Growth

Relatively stable (Average %)

China : 7.32

U.S. : 3.15

Inflation

Upward sloping (Slope)

China : 0.82

U.S. : 0.24

28 May 2014


Source: Bloomberg


U.S. Financial Conditions improved : May’13 to May’14

9

Significant increase in Stock Market (S&P 500), very low Volatility in Equity Market (VIX)

Credit & term spreads are below 52week averages, low yield volatilities.

28 May 2014


Source: Bloomberg


Euro Area Financial Conditions : May’13 to May’14

10

Stock Markets increased but not as much as in the U.S., relatively low volatility

Mixed results for credit & term spreads. Improvements are not as pronounced as in U.S.

28 May 2014


Source: Bloomberg


BRICS Quarterly Trend Analysis

11

28 May 2014


Source: Bloomberg


U.S. Monetary Policy : QE Regimes Apr’12 to Feb’14

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28 May 2014


Source: Bloomberg

Period 0: April 4 – June 1, 2012, Period 1: June 4, 2012 – May 21, 2013 Period 2: May 22 – Sept. 17, 2013, Period 3: Sept. 18 – Dec. 17, 2013

Period 4: Dec. 18, 2013 – Feb. 27, 2014


Potential Impact of Fed Rate Increase on Treasury Returns

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28 May 2014


Source: Bloomberg Calculated 31 Oct 2013


U.S. Monetary Policy : Fed rates Jun’14 to Jan’15

14

U.S. Federal

Reserve

Interest Rate

Forecasts

Current Implied

Probability of

Rate Changes

QE

Bond Purchases

??

Monetary Policy

to continue with

low rates, higher

liquidity

28 May 2014


Source: Bloomberg

Forecast


Commodity Derivatives Markets

Commodity Price Forecasts

Price Discovery role of exchange traded derivatives

Longer horizon forecasts based on liquid extended contract months

Demand & Supply

Hedging Demand & Supply of Speculative trading

Econometric and/or fundamental analysis based forecasts

If short to medium horizon forecasts of derivatives markets and analysts “do not agree”, market efficiency maybe adversely affected by excess speculative trading/positions.

Market Impact Analysis (example from two equity markets)

Food vs. Energy

15

28 May 2014



Commodity Price Forecasts: Derivatives vs. Analysts

16

28 May 2014


Source: Bloomberg

Metals: Aluminum, Copper, Zinc and Lead



17

28 May 2014


Source: Bloomberg

Energy: Oil Price Forecasts NYMEX vs ICE



18

28 May 2014


Source: Bloomberg

Energy: Gas and Coal Forecasts


Market Impact Analysis : HSI reaction to news

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28 May 2014


Source: Bloomberg

5 minutes following HSBC China Manufacturing PMI Release 30 minutes following HSBC China Manufacturing PMI Release


Commodity Derivatives : Food vs. Energy

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28 May 2014


Source: Barchart.com

Energy,

Agricultural &

Alternative

Fuels

Food vs.

Energy

As gasoline

price

increases

Ethanol and

Corn prices

diverge !


Corn : Consumption vs. Export

21

As fossil fuel prices increase corn

exporting countries may reduce

exports to process corn into ethanol for domestic or

exporting alternative fuel.

Global

macroeconomic and regulatory factors impact

relative prices of commodity derivatives .

28 May 2014


Source: Bloomberg


Corn Production & Consumption: China vs. U.S.A.

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28 May 2014


Source: Bloomberg


Market Impact Analysis : S&P 500 reaction to news

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28 May 2014


Source: Bloomberg

5 minutes following Manufacturing PMI Release 30 minutes following Manufacturing PMI Release


Global Markets : Past, Present & Future

Continued Effects of Recent Crisis (already 5 to 6 years ago)

Recovery vs. Growth : Financial sector vs. Macroeconomics

Changes in the landscape of financial institutions and trading:

Commercial Banks, Hedge Funds, Investment Banks and Sovereign Funds

Central clearing of OTC instruments: Exchange Traded vs. OTC

Consolidation of exchanges & technology

Cross-country mergers (U.S. and European exchanges)

Cross-asset classes (stock and derivatives exchanges)

Direct Market Access (DMA), Algorithmic Trading (Algo), High Frequency Trading (HFT)

Regulation, Regulation, Regulation

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28 May 2014



Conclusion: Noteworthy Issues to Watch

Financialization of commodity markets

Hedge funds’ and banks’ participation (potential excess speculation)

Proposals to further regulate position limits for hedge funds, banks, i.e. speculators

Banks’ investment in physical commodities

Proposed regulation to limit bank ownership of physical commodities

Numerous banks pulling out of investing in physical commodities, e.g. Bank of America, Barclays, Deutsche Bank and JPMorgan Chase

Potential of OTC clearing houses to be the new “too-big-to-fail”

Recent episodes of “price fixing” in underlying assets

Regulation in reaction to LIBOR rate manipulation and London Gold fix

Potential new financial centers to play a more significant role in pricing

Technological advances and improved market structures

Expansion of HFT and algo (especially in market making)

Proposed regulatory changes in reaction to perceived adverse effects of HFT

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28 May 2014



Thank You！

谢谢！

Ahmet Karagozoglu, Ph.D.

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